Accounting for Receivables Receivables are Assets (Increase side

is a debit) that are expected to be converted to cash in the future

Classes of Receivables Trade Accounts Receivable

Primary sources are customers Notes Receivable

Primary sources are loans to customers and conversion of Accounts Receivable

Accrued Receivables: Adjusted at end of period

Trade Accounts Receivable Debit Accounts Receivable and

credit Sales (Or Service Revenue) when revenue is earned

Debit Cash and credit Accounts Receivable when cash is received

If a cash discount is earned by the customer the cash received will be less than the account receivable and the difference is debited to Sales Discount

Sales on Account: Unique Problems

Accounts that become uncollectible

Two methods used to account for these Specific write-off (simpliest)

Simply write off the account when it becomes uncollectible (This method is acceptable whenever write-offs are nominal and consistent over the years

Debit Bad Debts Expense XXX Credit Accounts Receivable XXX

Sales on Account: Unique Problems

Allowance Method (More complicated) End of year ‘estimate’ of the amount of year

end receivables that will not be collectible in the next year (There are several methods used to estimate the uncollectible receivables)

Debit: Bad Debt Expense Credit: Allowance for Doubtful Accounts

When actual write-offs occur— Debit: Allowance for Doubtful Accounts Credit: Accounts Receivable This method is used for large companies that

have larger amounts of bad debt write-offs

Notes Receivable Primary difference is all terms are

specified in writing and notes ordinarily are for a longer period of time thereby having an interest charge incorporated

Journal entries are: Note is made

Debit Notes Receivable XXX Credit Accounts Receivable (Cash) XXX

Note is collected Debit Cash XXX Credit Notes Receivable XXX Credit Interest Revenue XX

Accrued Receivables Are the result of end of period

adjustments Example: Note is made on November 1,

2007 for 6 months in the amount of $1,000. The note has a 12% interest rate

Financial Statements prepared on December 31 would need to reflect the following adjustment

Debit Interest Receivable 20 Credit Interest Revenue 20

($1,000 * .12 * 2/12)